Written by Dave Young, President & Founder of Paragon Wealth Management
I was recently reminded of how much I disagree with the “Buy and Hold” concept of investing. One of our clients, brought in several stock certificates that she inherited from her family. They were dated from 1902 to 1920. That was a period of time when mining companies were very popular with investors. She asked us to research the current value of the certificates.
Her family held several of these certificates for over 100 years. Based on the number of shares and their valuation levels it appeared that some of these stocks had been valuable at one time. Unfortunately, her family had followed the Buy and Hold investment strategy and still continued to hold them.
After some research, it turns out that one company had been sued into oblivion, one morphed into another company and then that new company collapsed, one just disappeared, one went bankrupt and another had financial fraud issues. Bottom line, all of the stocks had gone from being valuable to becoming worthless….over time. They bought and held just like the “experts” told them to.
While this may seem surprising, it really isn’t. Imagine if your relatives in 1920 had the foresight to buy the original 20 stocks that made up the Dow Industrials average and held them until today. You would be very rich, right? Your relatives had bought the largest, highest profile stocks available 94 years ago. Actually, only six stocks (out of the original 20) from the Dow Industrial Average still exist.
If you read our blog, you know that I am not a fan of the Buy and Hold approach to investing. Actually, I get annoyed when I hear financial advisors and the media espousing its virtues. Some advisors support it with such zeal that it almost seems like it is a religious experience for them. I often wonder how many of those advisors actually have their own money invested in a Buy and Hold strategy.
The truth is that Buy and Hold works best sometimes and Active Management works better other times. Different styles of management come in and out of favor over market cycles. The big problem with Buy and Hold is that everything seems great while the market is going up. However, as soon as the market starts going sideways or down, then the Buy and Hold strategy becomes very difficult to stick with. If you cannot stick with your strategy then it is likely that you will never be able to generate good long term returns. If you aren’t going to generate good long term returns, then what is the point of investing?
In both the 2000 and 2008 bear markets, investors who followed a Buy and Hold strategy and invested in the S&P 500 lost roughly 50% of their value during those bear markets. Many found it too difficult to stick with that strategy and sold out of their investments near the bottom of the decline. Many investors never recovered from their extreme losses.
John “Jack” Bogle of Vanguard is one of Buy and Hold’s biggest proponents. It is hard to take him seriously when you understand that he has personally made a fortune pitching the Buy and Hold strategy for years. He is definitely not an impartial voice in the debate.
According to a November 28, 2013, Wall Street Journal article, Jack Bogle is invested in his son’s fund. It is even more interesting when you realize that his son, John Junior, has been managing a fund since 1999 that follows a very active investment strategy that is the polar opposite of Buy and Hold. His fund uses computer models to analyze earnings surprises, relative stock valuations, corporate accounting issues, etc. His strategy is about as far away from a Buy and Hold strategy as you can get. Even more interesting is that Jack (senior), considered the unofficial spokesman of the Buy and Hold movement, is personally invested in his son’s highly “Actively Managed” fund.
If John Bogle senior does not believe in using “Active Strategies”, then why is he personally invested in a fund that follows a very active strategy? Why is he paying higher fees than his index funds charge to invest some of his own money? Interesting….
My belief and experience is that pro-active strategies, such as the ones we follow at Paragon, require a lot more work to execute but provide the highest probability for long term investment success.
As always, if your risk tolerance or investment objectives have changed, please reach out to me or one of the members of our team, and we can discuss any adjustments we need to make to your current plan. We appreciate the confidence that you put in us.